Answers

Fundamentals Level – Skills Module, Paper F6 (MWI) December 2013 Answers

Taxation (Malawi) and Marking Scheme

Marks
1 Phiri Dengu Limited

(a) Other than annual allowances, investment and initial allowances are available to be claimed
Investment allowances can be claimed by a manufacturer, such as Phiri Dengu Limited, in the year in which
the asset is brought into use as follows: ½
– on new and unused industrial buildings and plant and machinery at 100%; and 1
– on used industrial buildings and plant and machinery at 40%. 1
Initial allowances can be claimed in the year of purchase at the rate of 20% ½
on the cost of the motor lorries. ½
Initial allowances cannot be claimed in respect of a private passenger motor vehicle; or on any asset where ½
the investment allowance has not been claimed. Therefore, Phiri Dengu Limited cannot claim initial ½
allowances on its factory buildings or plant and machinery.
No capital allowances are available on houses or offices as these are not qualifying assets. The exception is ½
where an office is attached to an industrial building and its cost does not exceed 10% of the total cost of the
building. 1
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(b) Taxes payable on the sale of the motor vehicle (all figures in K’000)
As capital allowances were claimed on the motor vehicle, a balancing charge or allowance will need to be
calculated and this will increase or reduce the taxable profits of Phiri Dengu Limited. 1
Balancing charge/allowance
K
Sale proceeds 850,000 ½
Tax written down value (750,000)
––––––––
Balancing charge 100,000 ½
––––––––
––––––––
Tax payable at 30% 30,000 ½
Phiri Dengu Limited is registered for value added tax (VAT), so it should charge VAT on the sale of the motor
vehicle at its open market value. 1
Therefore the VAT payable will be:
K1,000,000 at 16·5% K165,000 ½
Tutorial note: If the employee has only been charged VAT based on the selling price of K850,000, then he
will have to be charged the differential.
The sale of the motor vehicle at less than market value has resulted in the balancing charge being
understated. The Revenue authority are likely to consider this understatement, i.e. the difference between the ½
selling price and the open market value of K150,000, to be a benefit which will be subject to fringe benefit
tax. 1
Therefore the additional fringe benefit tax will be:
K150,000 at 30% K45,000 ½
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(c) Taxable income for the year ended 30 June 2013
K’000 K’000
Profit before taxation 11,000 ½
Add: Items not allowed for taxation:
Local cost of sales:
Depreciation 1,500 ½
Stock of produce 3,550 ½
Export cost of sales:
Depreciation 800 ½
Financial expenses:
Consultancy 1,895 ½
Tax penalties 1,205 ½
Operational expenses:
Depreciation 3,350 ½
Fringe benefits tax 785 ½
Donations 985 ½
Pension contributions (K1,345*1%/16%) 84 1
Interest on loan to purchase shares 225 14,379 1
––––– –––––––
25,379
Less: Items allowed for taxation:
VAT on local sales (K28,500*16·5%/116·5%) 4,036 1
Dividends from local companies 1,200 ½
Proceeds from sale of a house 4,500 ½
Proceeds from sale of a motor vehicle 850 ½
Export allowance (Working 1) 2,955 W
International transport allowance (K15,000*25%) 3,750 1
Capital allowances (Working 2) 6,150 (23,441) W
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1,938
Add: Capital gain (Working 3) 1,466 W
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Adjusted taxable income 3,404
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Workings:
K’000
1. Export allowance
Export sales 42,000 ½
Cost of sales (30,000) ½
Export licence (180) ½
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11,820
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Export allowance 25% 2,955 1
2. Capital allowances
Capital allowances (per question) 6,250 ½
Less: Balancing charge (from part (a)) (100) ½
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Net capital allowances 6,150
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3. Capital gain on sale of house
Cost 2005 1,500 ½
Conversion factor 2·023 ½
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3,034
Selling price 4,500 ½
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Capital gain 1,466
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(d) Tax to be paid by or refunded for the year ended 30 June 2013
K’000 K’000
Taxable income (from (c)) 3,404
––––––
Tax at 30% 1,021 ½
Less:
Withholding tax:
– on local sales (Working) 734 1
– on interest K1,375 at 20% 275 1
Provisional tax 1,200 2,209 ½
–––––– ––––––
Tax to be refunded (1,188)
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30
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Working:
Local sales (net of VAT) (28,500 – 4,036) 24,464
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Withholding tax at 3% 734

2 Mapeto Produce Trading

(a) The income of a partnership is assessed on each partner individually and each partner is responsible for
paying their share of the tax. 1
However, a joint return is submitted to the Commissioner in respect of the partnership trade. Each partner is 1
separately and individually liable for the submission of the joint return. 1
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(b) Taxable profit of the partnership for the year ended 30 June 2013
K K
Loss for the year (2,259,000) ½
Add: Items not allowed for taxation:
Partners’ salaries
– Mayeso 850,000 ½
– Chakudza 700,000 ½
Purchases of assets:
3-tonner lorry 1,850,000 ½
Motor vehicle 450,000 ½
Laptops 300,000 ½
School fees for Mayeso’s child 165,000 4,315,000 ½
–––––––––– ––––––––––
2,056,000
Less: Items not taxable:
Introduction of capital:
– Mayeso 600,000 ½
– Chakudza 400,000 (1,000,000) ½
–––––––––– ––––––––––
1,056,000
Less: Items allowed for taxation:
Capital allowances (working) (1,010,000) W
––––––––––
Adjusted profit for tax 46,000
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Working: Capital allowances
Asset Cost Allowances
Initial Annual Total
K K K K
3-tonner lorry 1,850,000 370,000 370,000 740,000 1
Motor vehicle 450,000 – 90,000 90,000 1
Laptops 300,000 60,000 120,000 180,000 1
–––––––– –––––––– ––––––––––
430,000 580,000 1,010,000 ½
–––––––– –––––––– –––––––––– –––
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(c) Allocation of profit amongst the partners for the year ended 30 June 2013
Mayeso Chakudza Total
K K K
Salaries 850,000 700,000 1,550,000 1
School fees 165,000 – 165,000 1
Interest on capital 60,000 40,000 100,000 2
–––––––––– –––––––– ––––––––––
1,075,000 740,000 1,815,000
Share of profit (1,061,400) (707,600) (1,769,000) 2
–––––––––– –––––––– ––––––––––
13,600 32,400 46,000
–––––––––– –––––––– –––––––––– –––
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(d) Tax to be paid by Chakudza for the year ended 30 June 2013
K K
Partnership income (from (c)) 32,400 ½
Interest (K45,000/0·8) 56,250 1
Less: Exempt (10,000) 46,250 ½
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Dividends 0 ½
Wife’s salary 0 ½
Sale of personal car 0 ½
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Taxable income 78,650
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Tax
First K180,000 at 0% 0 ½
Less:
Withholding tax
– On interest K56,250 at 20% 11,250 ½
– On share of partnership interest
40% of K125,000 at 20% 10,000 1
PAYE (working) 147,000 1
Share of provisional tax paid
40% of K500,000 200,000 368,250 ½
–––––––– ––––––––
Tax to be refunded (368,250)
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Working: PAYE on salary of K700,000

K
First K240,000 9,000
Excess of K460,000 at 30% 138,000
––––––––
147,000
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(e) Provisional tax is paid quarterly, 25 days after the end of each quarter. 1
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3 (a) John Mwasi

(i) Value added tax (VAT) using the retailer’s special scheme
Where a retailer makes both taxable and exempt supplies, the output tax will be worked out in one of
two ways as follows:
(1) If the retailer keeps separate records of any exempt supplies, the total of these will be deducted
from the total of the daily gross takings for the month, and the output tax will be worked out by
multiplying the result by the VAT fraction; 1
OR
(2) If no separate record of exempt supplies is kept, the value of the taxable supplies will be calculated
from the purchase records, by dividing the total value of the taxable goods purchased for resale in
the month by the total value of all the goods purchased for resale in the month; then multiplying
the result by the total gross takings for the month and applying the VAT fraction. 1½

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The VAT fraction is:
Rate of VAT = 16·5
––––––––––––––––––– –––––– ½
100 + the rate of VAT 116·5
If the second (purchase) method is used, an adjustment to the output tax declared must be made on
each anniversary of the date the method was adopted. ½
The adjustment is made by recalculating the output tax based on the figures for the entire year and
comparing this output tax figure with the sum of the output tax figures calculated for each of the
preceding 12 months. ½
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(ii) Output tax for the month of June 2013
(1) Sales based method
K
Gross takings for the month 5,545,600 ½
Less: Exempt supplies (2,580,000) ½
––––––––––
2,965,600
––––––––––
Output VAT (K2,965,600*16·5/116·5) 420,021 ½
(2) Purchase based method
Total taxable purchases/total purchases 2,256,800/3,650,000 0·62 ½
Gross takings multiplied by this percentage: K5,545,600 x 0·62 3,438,272 ½
Output VAT 3,438,272*(16·5/116·5) 486,966 ½
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(b) Piringu Properties Limited

Value added tax (VAT) for the month of June 2012
Taxable
value VAT
K K
Output tax
Commercial property rentals 2,400,000 396,000 ½
Sale of commercial property 8,500,000 1,402,500 1
Residential property rentals (exempt) 0 0 ½
Sale of residential property (exempt) 0 0 ½
––––––––––– ––––––––––
10,900,000 1,798,500
––––––––––– ––––––––––
Input tax
Salaries and wages 0 0 ½
Telephones 125,000 20,625 ½
Security charges (K435,000 x 70%) 304,500 50,243 1
Water and sewerage charges (exempt) 0 0 ½
Electricity charges 95,000 15,675 ½
Rental for office building 435,000 71,775 ½
Motor vehicle maintenance 215,000 35,475 ½
Fuel 0 0 ½
Photocopier 600,000 99,000 ½
––––––––––– ––––––––––
1,774,500 292,793
––––––––––– ––––––––––
VAT payable 1,505,707 ½
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4 Munali Sports Club

(a) The income of a club formed and operated solely for recreational purposes is liable to taxation,
notwithstanding that the income arises from dealing with its members. ½
The taxable income derived from dealings with members is determined at 6·25% on all receipts and accruals ½
from the sale of goods, cinematograph performances, stage plays and gambling machines. 1
No separate tax is levied on profits made from these trading activities. ½
Receipts from subscriptions and entrance fees is not subject to taxation. 1
Income received from sources other than members, such as investment income, is taxed as normal. ½
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(b) Tax payable for the year ended 31 December 2012

K
Bar sales 4,850,000 ½
Restaurant sales 2,758,500 ½
Drama shows 450,000 ½
Video shows 175,000 ½
Subscriptions and entrance fees 0 ½
––––––––––
8,233,500
––––––––––
––––––––––
Taxable income at 6·25% 514,594 ½
Add: Bank interest 185,000 ½
––––––––
Total taxable income 699,594
––––––––
Tax at 30% 209,878 ½
Less: K
Withholding tax 37,000 ½
Provisional tax 45,000 (82,000) ½
––––––– ––––––––
Tax to be paid 127,878
––––––––
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(c) The following transactions require a tax clearance certificate:

(i) the transfer of land and buildings;
(ii) the renewal of a certificate of fitness for commercial vehicles;
(iii) the issuance of a business residence permit;
(iv) the renewal of professional business licences and permits for medical practitioners, dentists, legal
practitioners, engineers, and architects;
(v) the renewal of certificates of registration under the National Construction Act;
(vi) the transfer of a company as a going concern;
(vii) the change of ownership of a company;
(viii) the externalisation of funds to non-resident service providers;
(ix) the renewal of a business licence by the Ministry responsible for industry and trade;
(x) the renewal of a tourism licence by the Ministry responsible for tourism;
(xi) the renewal, extension or transfer of a mining licence, or the transfer of mineral rights by the Ministry
responsible for energy and natural resources;
(xii) the renewal of a telecommunications licence by the Malawi Communications Regulatory Authority; and
(xiii) the renewal of the registration of a public transport conveyance by the Road Traffic Directorate.
Only SIX items required, 1 mark each maximum 6
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5 Bestheza Company Limited

(a) (i) As a division

2013 2014 2015
K K K
Wholesale units adjusted results for tax purposes
Profit before tax (6,600) 4,550 4,000 ½
Add: Depreciation 855 785 800 ½
Less: Capital allowances (1,255) (890) (755) ½
–––––– –––––– ––––––
(7,000) 4,445 4,045
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Bestheza Company Limited
Taxable profits:
– Bestheza 8,500 4,500 (3,500) 1
– Mwatipeza division (7,000) 4,445 4,045 1
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Total 1,500 8,945 545
–––––– –––––– ––––––
Tax at 30 % 450 2,684 164 1½
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(ii) As a subsidiary
2013 2014 2015
K K K
Mwatipeza Wholesale ‘Limited’
Taxable profits (as in (i)) (7,000) 4,445 4,045 ½
Less: Tax loss carried forward – (7,000) (2,555) 1
–––––– –––––– ––––––
(7,000) (2,555) 1,490
––––––
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Tax at 30% 0 0 447 1
Bestheza Company Limited
Taxable profits 8,500 4,500 (3,500) ½
–––––– –––––– ––––––
Tax at 30% 2,550 1,350 0 1½
Total tax (group) 2,550 1,350 447 ½
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(b) If the wholesale unit is operated as a division of Bestheza, then the losses and profits will be automatically
offset against each other for tax purposes. This results in all losses incurred in the three years being utilised
in the same period as the loss was incurred. 1½
If the wholesale unit is operated as a separate company (subsidiary), then Bestheza and Mwatipeza are each
taxed separately. Therefore, their losses and profits may not be offset for tax purposes and any losses can
only be carried forward and used against future profits in the same company. 1½
As a result, relief for Mwatipeza’s 2013 loss would be deferred until 2014 and 2015 and Bestheza’s 2015
loss must be carried forward to 2016. ½
If losses are expected to continue in either the manufacturing (Bestheza) or wholesaling (Mwatipeza)
operations, it is advisable for Mwatipeza to be operated as a division of Bestheza as this will result in an
overall lower tax liability for the group. 1½
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